Snapping his fingers

by Russ Roberts on January 31, 2008

in Fooled by Randomness

I debated an economist the other day on the stimulus package. He thought it was a good idea and that it would stimulate the economy. I disagreed.

When we were done, we were chatting informally. He was a nice guy. Smart. Articulate. I asked him if there was any evidence that the 2001 "rebates" had any effect. He looked at me earnestly and said, "Sure. The economy recovered."

He was serious.

There once was a man on a Manhattan street corner snapping his fingers over and over again. What are you doing, someone asked. Keeping away tigers, he said. You don’t think that really works, do you? It’s working so far, he answered.

How would you know whether the 2001 rebates "stimulated" the economy? Or the 2002 rate cuts? I did see a reference to a CBO study that showed that personal spending rose after the rebates. Real of finger snapping? Very hard to say.

Interestingly, I just discovered that the 2001 "recession" turned out not to be a recession in the formal sense of two consecutive quarters of falling real GDP. At the time, there were three consecutive quarters. But when the data were revised:

The new data show GDP falling at an annual rate
of 0.5% in the first quarter of 2001, then rising at an annual rate of
1.2% in the second quarter and falling again at a rate of 1.4% in the
third quarter.

The old data had GDP falling at annual rates of
0.2% in the first quarter, 0.6% in the second quarter and 1.3% in the
third quarter.

Here are the current data, after the 2004 revisions, for real GDP by quarter in 2001 (in billions):

9,875.6
9,905.9
9,871.1
9,910.0

So in the fourth quarter, GPD not only went up, it went up enough to offset the fall in the third quarter. So in the technical sense, there was no recession. But employment did very poorly and took a long while to recover. Here is monthly total nonfarm employment, in thousands:

2001 132471 132551 132504 132209 132177 132047 131930 131776 131521 131191 130883 130721  
2002 130594 130476 130430 130347 130324 130371 130290 130275 130206 130324 130334 130191  
2003 130256 130103 129907 129859 129826 129850 129860 129818 129899 130075 130130 130298  
2004 130412 130443 130786 131073 131342 131444 131503 131610 131780 132130 132195 132363  
2005 132458 132693 132817 133157 133345 133610 133937 134139 134244 134351 134702 134904

So in February of 2001, total nonfarm employment was  132,551,000. It took FOUR YEARS for employment to return to that level. This is very unusual. What was the reason? No one really knows. At the time, some blamed it on Bush because the recovery after the "recession" was so slow. The defenders of Bush said that the recovery was slow because the downturn was so mild. I suspect that the real cause of the slow growth in employment had other causes such as an increase in productivity. Maybe. No one really knows.

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{ 8 comments }

Peden January 31, 2008 at 9:46 am

Is it not generally agreed upon that such stimulus does not work in the long run? (Although as Keynes said: In the long run we are all dead)

Chris Meisenzahl January 31, 2008 at 10:43 am

LOL, great analogy. ;-)

Floccina January 31, 2008 at 12:15 pm

Should have been:

So far, so good.

Patrick R. Sullivan January 31, 2008 at 12:19 pm

Employment didn't return to the levels of 2000 quickly, because it was abnormally high thanks to the dot com boom/bubble.

James Hanley January 31, 2008 at 1:22 pm

Is it not generally agreed upon that such stimulus does not work in the long run?

Actually, I thought that it was generally agreed (by economists, but apparently not by Republican presidential candidates) that it didn't really even work in the short term.

Re: "Sure, the economy recovered." He was really an economist? Or was it more like, "I'm not an economist, but I play one on TV"?

jorod January 31, 2008 at 1:44 pm

I thought it was the tax cuts that saved the economy, not the rebates.

Andy February 2, 2008 at 7:05 pm

The technical definition of a recession is whatever the NBER says it is, according to http://www.nber.org/cycles.html.

Rather, "The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

Thomas Y February 5, 2008 at 12:05 am

With the recession so close in 2001, I don't quite get why the real GDP data was revised so that a recession was avoided on technicality. Was the revision used to mask the recession or was there a true purpose to its change? Couldn't the slow growth in employment be affected by the war on terrorism that kicked off during the 2001 time span? I would think that with an ongoing war, money and resources are needed to fuel the attack, which unfortunately negatively affects consumers back at home (ex. gas prices). Therefore, wouldn't employers be more wary of employing more people than they can afford at the moment and wouldn't they be looking for any reason to cut costs (ex. laying off workers)?

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